Labor Market Side Effects of Health Reform in Massachusetts and America

Massachusetts began a near-universal healthcare system circa 2007. The entire United States will begin one twelve months from now, pursuant to its “Affordable Care Act” (ACA). Can a labor economist interested in the ACA learn from the MA experience?

The ACA design is said to have been influenced by the MA program. I agree with that for the purposes of discussion.

The CBO and other analysts of the ACA have jumped to the conclusion that the major MA labor market effects, if any, of the MA reform are informative about the US labor market effects of the ACA.

It may be true that the HEALTH MARKET effects of the ACA will be similar to the MA health market effects of the MA reform, but economic theory contradicts the assumption that the two laws have similar LABOR MARKET effects.

From a labor market perspective, two margins are important: the margin between unemployment and work, and the margin between employer-sponsored insurance (ESI) and other sources of insurance. The ACA and the MA situations are entirely different in these dimensions.

THE REWARD TO WORKING
The ACA gives essentially free health insurance to the unemployed for the first time (with the exception of 18 months or so during the “stimulus” when COBRA payments were 65 percent subsidized for people on unemployment insurance). In this way, the reward to working in the US will be significantly lower after 1/1/2014 than it was before.

The MA reform did not change this part of the reward to working in MA because health insurance was already essentially free for the unemployed. By the time MA had implemented its health reform, its “Medical Security Program” (MSP) was almost 20 years old. MSP gave (and still gives) people on unemployment insurance (UI) the option to have the state pay for 80 percent of their private health insurance premiums (up to $1200 per month!) or to receive health services directly from the state. MA’s MassHealth Essential program provides benefits for the long-term employed (whose UI benefits have presumably expired). Like UI itself, these two programs are not asset tested. The two HI-for-unemployed programs are not experience rated.

Another part of the reward to working comes from the sliding scale subsidies to people working for employers not offering ESI. Both MA and US reforms have subsidies like these, but the MA subsidies apply to a much smaller slice of the population. For one, the frequency of no-ESI employers is much greater in the US pre-ACA than it was in MA pre-MA-reform. Second, the MA subsidies applied to persons up to 300 percent of the federal poverty line (FPL), as compared to the 400 percent threshold in the ACA; there’s a lot of people in that 300-400 percent range. Third, the ACA subsidies will be more like cash than the MA subsidies because ACA beneficiaries will use them for pretty much any health insurance plan (for example, the same health plan that their Congressman and his family will use) whereas the MA subsidies can only be used for one of five state-sponsored plans. Judging by their pre-subsidy costs, the MA state-sponsored plans appear to offer less than private sector plans. This MA practice enhances the reward to working: as one moves above 300 percent of the poverty line he loses his subsidy, but he also gets access to better health plans.

The end result of the MA sliding scale subsidy is that only 0.16 million people (including dependents) receive them in a state with a population of 6.6 million. The ACA subsidies, on the other hand, are widely expected to be received by a much greater fraction of the US population. Naturally, a subsidy hitting a larger fraction of the population has a larger labor market impact.

So the only ways that MA health reform can be informative about the effects of the ACA on the quantity of labor (e.g., the fraction of the population employed) is that: (a) the reward to working doesn’t matter that much or (b) analysts have made a correction or adjustment for this fundamental difference between the two reforms. So far, I doubt that either condition holds.

EMPLOYERS’ COMPARATIVE ADVANTAGE IN PROVIDING HEALTH INSURANCE

The MA reform is also quite different from the ACA in terms of how it changes the incentives for employers to offer health insurance. There are many differences in this regard, but I begin by naming one or two.

The MA reform distinguishes offering health insurance to employees from helping employees pay for it. In MA, employers can offer health insurance to employees without an employer premium contribution by setting up a “125 plan,” which allows employees to use their own pre-tax dollars to buy health insurance (for employees below 300% FPL, I think this opportunity includes the purchase of subsidized plans). Under the 125 plan, the employer only assists a bit in the administration of the premium payments/withholding.

The MA employer penalty for NOT offering a 125 plan (or ESI narrowly defined) can potentially be large: the employer can, in effect, be liable for all of the health costs the state of MA incurs in caring for its employees. A small to medium-sized employer with the bad luck of having two employees get triple-bipass surgery in the same year may find himself wiped out by this “employer free-rider penalty.” Admittedly, as of 2010 the state of MA had yet to collect a single dollar of the free-rider penalties, but employers may nonetheless be scared to death of that liability, which may have led them to adopt 125 plans in mass (and thereby the state gets no revenue from the penalty).

The MA employer penalty for not paying for any/enough of their employees’ health insurance is just $295 per employee per year.

The ACA does not attempt to encourage 125 plans. In fact, MA may have to eliminate this part of its health reform when the ACA goes into effect. The ACA penalizes employers $2000 (and growing) per full=time employee if the employer does not offer affordable ESI.

One issue here is measurement. Does an employee who buys insurance through a 125 plan consider himself as having ESI? My guess is that he does, and that some of the population surveys are not well suited to detect the distinction, but more research is needed on this. Until then, I’m not sure how to interpret findings that ESI increased somewhat in MA after its reform.

Second, if we include 125 plans as ESI, the MA employer penalty for not having ESI in one form or another is potentially much larger than the $2000 ACA penalty.

Third, as noted above the MA subsidies to persons without ESI are infrequent as compared to the expected frequency of ACA subsidies. Moreover, the MA subsidies are less because MA restricts subsidy recipients to one of five less costly plans. Thus, MA employers have relatively few employees who would gain if ESI were dropped.

In summary, ACA proponents have likely been mistaken in taking comfort in the MA experience: the MA and ACA reforms are not comparable from a labor market perspective. More surely, if it cares about its labor market, America was imprudent to adopt such a sweeping law before these issues could be acknowledged and better understood.

Casey B. Mulligan is a Professor in the Department of Economics. Mulligan first joined the University of Chicago in 1991 as a graduate student, and received his Ph.D. in Economics from the University of Chicago in 1993.

He has also served as a Visiting Professor teaching public economics at Harvard University, Clemson University, and Irving B. Harris Graduate School of Public Policy Studies at the University of Chicago.

Mulligan is author of the 1997 book Parental Priorities and Economic Inequality, which studies economic models of, and statistical evidence on, the intergenerational transmission of economic status. His recent research is concerned with capital and labor taxation, with particular emphasis on tax incidence and positive theories of public policy. His recent work includes Market Responses to the Panic of 2008 (a book-in-process with Chicago graduate student Luke Threinen) and published articles such as “Selection, Investment, and Women’s Relative Wages,” “Deadweight Costs and the Size of Government,” “Do Democracies have Different Public Policies than Nondemocracies?,” “The Extent of the Market and the Supply of Regulation,” “What do Aggregate Consumption Euler Equations Say about the Capital Income Tax Burden?,” and “Public Policies as Specification Errors.” Mulligan has reported on some of these results in the Chicago Tribune, the Chicago Sun-Times, the Wall Street Journal, and the New York Times.

He is affiliated with a number of professional organizations, including the National Bureau of Economic Research, the George J. Stigler Center for the Study of the Economy and the State, and the Population Research Center. He is also the recipient of numerous awards and fellowships, including those from the National Science Foundation, the Alfred P. Sloan Foundation, the Smith- Richardson Foundation, and the John M. Olin Foundation.